A Much Needed Crisis?

Edouard Sevil

Monday, 14 Nov 2011 | 9:33 AM ETCNBC.com

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This past week, the markets had been extremely volatile because of the news coming out of Europe and Italy. We had very interesting debates in our Securities Markets & Investment class about the yield on Italian bonds: can yields above 7% for Italy be considered a Black Swan event? Is it just the market’s way of ousting Mr. Berlusconi and pushing for reforms? Or do investors actually believe that Italy will not be able to repay its debt?

I believe that investors should be ready for a bumpy ride in the next year. Italy will not be the last European country to feel pressure from the markets. Any government that seems reluctant to implement strong austerity measures is a potential target. Fixed income traders have their eyes on Europe and there is no escaping their scrutiny.

I’m originally from France and it is the first time in my life that the government has actually implemented serious austerity measures. I was not yet born the last time we had a balanced budget, which was at some point in the early seventies. I cannot tell what the future has in store, but I hope that this crisis will have helped my fellow countrymen understand that we cannot live above our means.

I will leave you with a question: could this happen to the U.S.? Much like Europe, the country is living above its means and its debt is on its way to reaching 100% of GDP next year. We saw last summer that yields on T-bonds were not affected by the downgrading of the country’s credit rating by S&P, but will that always be the case?